Germany's Economy Contracts

Growth: Economists expect further slowing in the current quarter, which could push Europe to the brink of a recession.

BERLIN — Europe moved a step closer to recession Thursday with the news that the German economy unexpectedly shrank in the third quarter, as consumers and firms reined in spending even before the full effect of the Sept. 11 attacks was felt.

The total value of goods and services produced in Germany in the three months through September slipped 0.1% from the previous quarter, the first decline in more than two years, the government statistics office said.

Economists expect further contraction across Europe in the current quarter, led by Germany, which accounts for about a third of economic activity in the 12 nations using the euro. A recession is commonly defined as two consecutive quarters of negative growth.

"Germany is, of course, the weakest link," said Claudia Henkel, an economist at Dresdner Bank in Frankfurt, Germany. With countries such as France faring a little better, "Euroland may just squeak past a recession if there is only a stagnation in the third quarter," she said.

The German economy has slowed dramatically since expanding by a healthy 3% in 2000. Growth was only 0.4% in the first quarter and flat in the second--a performance economists had expected to continue in the July-September period.

The German government, after claiming much of the credit for that expansion, has blamed the weakness in the United States for the slowdown and for forcing it to abandon a central pledge to cut unemployment.

Chancellor Gerhard Schroeder had promised to cut the number of people out of work to 3.5 million in time for national elections next fall, but big firms such as Siemens and truck maker Man have announced thousands of job cuts.

Finance Minister Hans Eichel said Wednesday that unemployment now could rise 9% this winter from 3.7 million in October.

Despite the slowdown, the government continues to reject calls from industry and the opposition for deeper tax cuts and sweeping reforms of labor markets. Schroeder said Germans don't want "American conditions," in which firms are much freer to hire and fire.

"The labor laws here provide a good enough framework," Economy Minister Werner Mueller told a gathering of executives from German engineering companies Thursday.

But other major European economies are weathering the problems better, with France, Britain and Italy all growing more quickly.

"We've got one foot in recession," said Ulrich Ramm, chief economist of Commerzbank, forecasting an additional 0.25% decline in the fourth quarter for Germany and calling for the government to cut red tape and consider easing taxes.

Europe's economic gloom also has helped weaken the euro, just before the common currency adopted by Germany and 11 other nations begins circulating in January.

The new currency was little changed in afternoon trading at about 87.75 cents but has slid from a high of about 93 cents since mid-September, reflecting the view of many investors that the U.S. economy will rebound more quickly than Europe's.

But the German Finance Ministry, which with other economists expects German growth of about 1.25% next year, up from 0.75% this year, responded to Thursday's figures by insisting that a recovery here isn't far off.

"The risks to the economy have grown," it said. "But the economic weaknesses should be overcome soon. The positive economic forces will gain the upper hand in 2002."